Monday, January 09, 2006
Research Note: Media 2.0, On-Demand, and Strategy
"..."We have growth options, and I think we're going to surprise a lot of people," Moonves says. "Our future success will depend on maximizing the use of our great entertainment, news and sports content everywhere and being paid for it.
...Like its rivals, CBS is making rapid-fire content deals with every kind of distributor: Verizon's V Cast video, Comcast video-on-demand, iPod audio and others. In most cases, CBS receives the lion's share of the on-demand user fees for providing select program clips (as for Verizon cell phones) and full-length series with TV commercials intact (as with Comcast VOD), well-placed sources say. CBS also gets a critical first read on the impact new-media options will have on its core businesses, consumer and advertiser behavior and its balance sheet."
Today, the strategy media incumbents are slowly reaching is to shift to �on-demand� distribution � to slowly end the tyranny of the blockbuster. The intent is admirable � blockbusters result in damaging competitive dynamics.
The problem is that �on-demand�, without market power, is really an antistrategy. It's not a strategy at all � it's trivially dominated; it's a recipe for domination. Because the media industry still doesn�t understand why or how it�s deep economics are changing, it can�t build new strategies to dominate those economics � and so is about to get dominated instead.
Why are incumbents choosing this route? Because today, they can earn short-term, incremental revenues by doing so, as the costs of distributing media online fall, while the benefits continue to multiply � as online ad spending continues to explode, and consumers become more and more willing to pay for unbundled media.
But Bubblegen has long argued that a short-term focus on revenues is the most strategically toxic thing media � or any kind of � incumbents can do in industries where fundamental economics are shifting tectonically. It�s more important to understand why and how industry structure is being disrupted; without that understanding, finding new, durable sources of advantage becomes a matter of luck.
Consider what's really happening here, from a deep economic point of view - not just from the perspective of numbers on a spreadsheet. If we�re rational, we�ve got to think not just about what revenues we can gain in the short term � but how value will shift in the longer term, and what share of it we can capture.
In the long-term, value capture is a function of industry structure � and so any strategy is dominated unless incumbents also invest in sources of market power. But, incredibly, media incumbents are aren�t just failing to invest in future sources of market power � they�re actively subsidizing the future market power of others.
How? In the media industry, the resources of the firm are being unbundled at the edge. Why? Market power has shifted to the edges of the value chain: to consumers and to platforms.
Why? Barriers to entry and switching costs have been vaporized by hyperefficient modes of production, publishing, and distribution � Microplatforms, Smart Aggregators (aka search), and Reconstructors. The universe of media is exploding, and the value chain is atomizing � and attention is now the scarce resource in the value chain.
Why? The root cause of the media industry�s problems is economic � the price of coordination has dropped discontinuously, enabling the rise of these new models. New sources of advantage in the media industry must leverage cheap coordination � not fight it.
What the �on-demand� � AKA media 1.0-as-service � strategy amounts to is a bet on investing in production: that by investing in (and creating) the �best� shows, traditional media will retain a higher market share � a higher attention share, essentially.
But this is a bet on the wrong kind of production. This kind of production investment is necessarily dominated, because, relative to other kinds of production investment � in Reconstructors, Microplatforms, and Communities � it creates less market power, realizes more risk, and realizes no sustainable attention scale and scope economies.
Where does market power come from in the new media value chain? From either edge: Microplatforms and Communities, which let consumers produce and self-organize around media, and Reconstructors, which reconstruct personalized �casts of media. Both of these will gain increasingly dominant attention share, because they realize natural economies of scale and scope to attention.
Reconstructors and Microplatforms are the right way for incumbents to invest in production � they shift incumbents away from the obsolete media economics of diminishing returns, and to the new economics of increasing returns. Increasing returns, are, in an atomized value chain � one where anyone can produce, publish, and distribute media almost frictionlessly � the only sustainable new sources of entry barriers and switching costs.
What simply shifting to �on-demand� without investing along the new value chain does is simply subsidize Reconstructors and Smart Aggregators � like Google and Apple. Content, in the near future, won�t be a source of market power � it will be commoditized. Value chain atomization means that the average return to content is already decaying fast across media markets. Focusing on content ultimately gives new models more and more leverage to realize attention economies of scale and scope.
By focusing on the short-term, as it�s done so many times in the past, the media industry is mortgaging the future. This time, though, the price of antistrategy will be steeper than ever before; like Ford and GM never recovered from their inability to understand and dominate the economics disruption of the 70s and 80s � cheap information � so it will be difficult for media incumbents to recover the market power incumbents are about to cede to Apple, Google, and a clutch of new startups.
Great post. So right on the money. This shift in the media model will pose great opportunities for many new networks.
Great article. Internet media companies are the big winners in this new media market. They are monetizing the value created by others.